## The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre

_IMF News, October 2, 2014_

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## Bibliographic details
- Authors: Christine Lagarde Managing Director
- Published: October 2, 2014

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### State of the Global Economy—A New Mediocre?
- Overall view
  - Global economy is weaker than envisaged six months prior; only a modest pickup foreseen for 2015; outlook for potential growth pared down.
  - Recovery is brittle, uneven, and country-specific.
  - Advanced economies: rebound strongest in the United States and the United Kingdom; modest in Japan; weakest in the Euro Area, with internal disparities.
  - Emerging market and developing economies accounted for more than 80 percent of world growth since 2008; led by Asia and China, but growth likely at a slower pace than before.
  - Low-income developing countries, including Sub-Saharan Africa, have rising prospects—with growth projected broadly to accelerate beyond the 6 percent recorded last year.
  - Middle East outlook clouded by difficult economic transitions and intense social and political strife.

- Risks and "clouds"
  - Low growth for a long time: lower expected growth potential can reduce investment and consumption today, impeding recovery—especially in advanced economies with high unemployment and low inflation (example: Euro Area).
  - Asynchronous monetary policy normalization in advanced economies and potential spillovers to other countries via interest rates and exchange rate variations.
  - Financial sector concerns:
    - Asset valuations at an all time high; spreads and volatility at an all time low.
    - Migration of market and liquidity risks to the less-regulated, nonbank ("shadow") sector.
    - Shadow banking: in the United States, now considerably larger than the traditional banking system; in Europe, roughly half the size; in China, at 25-35 percent, it is the fifth largest shadow banking sector in the world.
    - Need to complete financial sector reform: resolve the too-important-to-fail problem, set an appropriate perimeter for monitoring shadow banks, and make derivatives markets safer and more transparent.
  - Geopolitical risks:
    - Possible further escalation in Ukraine with disruptions in commodity prices, financial markets and trade;
    - Political developments in the Middle East and parts of Asia;
    - Expansion of the Ebola outbreak in Africa.

### New Momentum—Policy Priorities
- Overarching approach
  - Generate "new momentum" through a better balance in the policy toolkit—using both demand and supply side measures.
  - Monetary policy has provided important support (example: U.S. Federal Reserve quantitative easing) but cannot suffice alone; prolonged easy money risks fueling financial excess.
  - Importance of clear communication and gradual exit (example: Fed) and adoption of macro-prudential policies, especially in emerging markets (e.g., minimum liquidity ratios).

- Fiscal policies (growth-friendly and job-friendly)
  - Preserve gains from efforts to reduce excessive deficits and bring debt under control; use sensible pace and composition of consolidation attuned to country circumstances.
  - Well-targeted measures can boost growth: reforms to address tax evasion, support more efficient public spending, and reduce burden on labor (lower payroll taxes).
  - Reform of energy subsidies, estimated at about US$2 trillion, can generate revenue; these subsidies mostly benefit the relatively affluent and harm the environment.
  - Fiscal measures should be growth-friendly, job-friendly, and environment-friendly—but cannot substitute for structural reforms.

- Structural reforms (labor and product markets)
  - Scale of challenge:
    - More than 200 million people around the world are still unemployed, of which 75 million are youth.
    - Except for the top 1 percent, most people have seen incomes stagnate or shrink in recent years.
  - Policy levers:
    - Well-designed active labor market policies and training programs to bolster demand for workers—examples include Australia, Germany, and Sweden.
    - Increase labor participation, especially of women—example: Japan expanding day-care centers; similar policies in Korea.
    - Open product and service markets where professions are closed to competition.
    - Improve flow of credit via insolvency regimes to help banks and private sector deal with debt burdens so credit can flow.

- Public investment in infrastructure
  - Crisis has depressed growth and investment; for G-20 countries, GDP is 8 percent lower than it could otherwise have been; shortfall in investment nearly 20 percent below trend.
  - Public capital stocks were depleted as public investment scaled back by a quarter—from about 4 percent of GDP in the 1980s to 3 percent today.
  - Example: American Society of Civil Engineers estimates 99 percent of the major roads in Washington DC are in poor condition.
  - Global estimates place infrastructure spending needs at US$6 trillion over the next 15 years.
  - Efficient infrastructure spending is crucial; integrating lower emission standards into infrastructure investment would cost about 4.5 percent of total projected spending.
  - Historically low interest rates present an opportunity: investment can be good for growth, jobs, and the environment.

### Concluding remarks on the new multilateralism and role of the Fund
- Multilateral cooperation examples
  - G20 coordination, including providing additional resources to the IMF and strategies to lift medium-term growth by a collective 2 percent of GDP by 2018.
  - IMF adaptations over 70 years: revamped lending toolkit, more flexible instruments for liquidity and emergency access, and introduction of zero-interest loans for low-income members.
  - IMF financial assistance: close to US$700 billion in commitments over the last 6 years.

- Analysis, capacity building, and governance
  - New IMF analysis on capital flow management, spillovers, inequality, fiscal implications of climate change, and the role of women in the workforce.
  - Capacity building and technical assistance now the IMF's largest service: almost 90 percent of the IMF's 188 members have benefited.
  - IMF Massive Open Online Course (MOOC): almost 2000 graduates in the last year.
  - Governance reform: majority of members have approved the 2010 Quota reform; awaiting approval by the United States.

- Institutional mission
  - IMF continues to adapt to safeguard stability, help countries through economic fallouts, and forge cooperative solutions to global problems—aiming to generate momentum to overcome the "new mediocre."

*The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre, by Christine Lagarde, October 2, 2014.*

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## References

- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [Ukraine and the IMF](http://www.imf.org/external/country/UKR/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Christine Lagarde](https://www.imf.org/external/np/omd/bios/cl.htm)
- [IMF Survey: New Momentum Can Help Global Economy Beat Mediocre Growth](http://www.imf.org/external/pubs/ft/survey/so/2014/new100214a.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Webcast of the Speech](https://www.imf.org/external/mmedia/view.aspx?vid=3819798840001)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp100214_